RRSPs – Reduction of Withholdings

1. He or she can fund the RRSP contribution from the after-tax take-home pay he or she receives. In this case, the employer has no involvement in the amount the employee contributes and the contribution has no effect on the employer's obligation to withhold income tax from the employee's net pay. 
2. It is not uncommon, however, for the employer to make the RRSP contribution directly to the employee's RRSP on his or her behalf. The employer may have established a group RRSP for its employees collectively, for example, or the employee may have directed the employer to withhold and remit a portion of the employee's wages directly to an RRSP.

Where the employer funds the RRSP contribution directly, the employer can take the amount of the contribution into account in determining the amount of income tax to be withheld from the employee's net pay. In this event, however, the CRA requires that the employer have "reasonable grounds" to believe that the RRSP contribution will be deductible to the employee involved (remember that RRSP deduction room is based on the employee's overall earned income, not just employment income.) CRA suggests that an employer will have reasonable grounds where the employee has provided an assurance or, better yet, a copy of his or her RRSP deduction limit statement, which accompanies each year's Notice of Assessment.

The RRSP contribution is deducted from net pay otherwise determined in the same way that union dues and employee pension plan contributions are.